Overdraft Fees Rising Despite Regulations

By AnnaMaria Andriotis

This month Fifth Third Bank will raise fees for overdraft transactions to as high as $37, up from $33. U.S. Bank also plans to increase overdraft fees to $15 and $35, depending on the size of the transaction, up from $10 and $33. Consumer advocates say that in spite of new regulation and an inquiry by the Consumer Financial Protection Bureau they expect more banks to follow suit. “Regulation has not driven down big bank overdraft fees and it has not led to price cutting,” says Jean Ann Fox, director of financial services for the Consumer Federation of America. “In fact, fees are starting to move up after two years of being stable.”

Overdrafts occur when consumers withdraw more money than is available in their checking account and banks advance the funds to allow the transaction to go through. Overall, the median overdraft fee rose to $29 in 2011, up 5.4% from 2010 and up 11.5% from 2009, according to research firm Moebs Services. Banks depend on the fees for revenue: they generated $31.6 billion in 2011, the firm says. Those earnings dropped from $37.1 billion in 2009 before new banking regulations went into effect – a decline that advocates say may explain the recent hikes.

Regulation E, which went into effect in 2010, prohibits banks from charging for overdrafts unless customers opted for coverage. When those without overdraft protection swipe their debit card for an amount larger than their checking account balance, the purchase will be declined. Separately, the Durbin amendment, which kicked in last October as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, lowered the fees banks receive from merchants when consumers swipe their debit cards. It’s estimated to cost banks an estimated $6.6 billion a year in lost revenue.

The CFPB, which was created in part to protect consumers from excessive banking fees, launched an investigation in February into checking account overdrafts and it’s requesting comments from the public through June 29. One proposal under consideration is that banks include a clear disclosure on consumers’ checking account statements that highlights the amount overdrawn and that total fees charged.

In the meantime, banks are adding to their menu of overdraft fees. Nearly two thirds of bank accounts that charge overdraft fees also charge “extended overdraft” penalties if the account remains overdrawn for around seven days, according to a new study released Thursday by Pew Charitable Trusts. That’s up from 45% in 2010. The 12 major banks that Pew studied also charge a median of $12 per “overdraft transfer,” up 20% from 2010. That’s when funds from another account are transferred to cover the overdraft.

For consumers, overdraft costs can be astronomical. Fees can be charged anywhere from three to 10 times (or more) a day, according to the CFA. Customers who pay a $100 overdraft after two weeks would incur the equivalent of a 900% to 3,000% annual percentage rate, according to the CFA. “This is the most expensive credit that banks extend to consumers,” says Fox.

For their part, the banks say the changes are partly a response to the new regulations that have lowered their revenue. “What you’re seeing is general pressure to find new sources of income to support the cost of providing checking accounts, and overdraft fees are one small source,” says Nessa Feddis, senior counsel at the American Bankers Association. In addition, she says, it costs banks about $250 to $300 per checking account each year to provide full service including data protection.

Just under 10% of checking account customers incur 84% of all overdraft fees, according to the CFPB. Consumers who’ve opted in to overdraft coverage can ask their bank to remove them from the program. But even then, they’re not guaranteed to escape these fees, experts say. Regulation E only requires that banks get customer approval to allow debit-card overdrafts. Banks are still permitted to let overdrafts go through for all their customers on payments made, like automatic bill pay and checks.

Fifth Third Bank and U.S. Bank say not all customers who overdraw will incur a fee. They don’t charge customers if their account is overdrawn by up to $5 or up to $9, respectively. Teri Charest, a spokeswoman for U.S. Bank, says the bank has features to help consumers avoid the fees, like email and mobile alerts of their balances. She says the fee change is part of the bank’s overall review of its deposit fees, which will include eliminating early closure fees on checking and savings accounts.

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